8 Reasons Why it is so D@*# Hard to Buy a Business!

At Capitus Group, we hear it all the time. Every week, people contact us when they decide they want to buy a business and they need help finding one to buy. Or, for some, they own a business and they want to make a strategic acquisition but they don’t have a company identified to buy.

Many of these prospective buyers are highly skilled and successful in their career and financially qualified. Most come from staff or division level positions in mid-size to large corporations. They fund their business acquisition with cash from savings, retirement plans, inheritance or cashing in stock owned in their last company. Most end up adding on bank or SBA debt.

They all think it will be easy to buy a business. After all, how hard can it be to spend money? For the vast majority, it is extremely difficult and they way under-estimate how long it will take.

Here are a few of the reasons why completing an acquisition is a lot like winning the lottery:

About 99.5% of business buyers have never been involved in buying a company. Other than networking among friends, family, business associates and business brokers, they have no idea how to buy a business. Consequently, many fail. Or, they are not prepared to spend 6 months to 2 years in their search.

They don’t follow the principle of “know what you know and do it. Know what you don’t knowand find an expert to do it for you.” In other words, they are unwilling to invest in the expertise they need to protect them in the deal, get the best deal and to actually get the deal done.

Business buyers don’t understand that we are by no means in a buyer’s market. Even though countless studies and forecasts continue to indicate that the boomer generation is selling off companies by the thousands, for the most part, this trend has yet to materialize. For every quality business (meaning that it is profitable) with any scale and some degree of growth, the market is highly competitive. Bidding wars ensue and prices get pushed up or buyers are forced to ignore trends and data that add undue risk to the deal.

You have to kiss a lot of frogs…

First time business buyers don’t understand that they may have to look at dozens of deal books on businesses in order to find just one to pursue. Worse, they may spend months doing research, due diligence and negotiating a deal only to lose it. Only then do they realize that those lost months are really painful and they may have to risk it all again. Many don’t have the stamina to continue.

It is arguably true that more acquisitions die on the business deal points and the legal terms than on price. Again, rookie business buyers, especially those who do not engage professional advisors, get caught up in the minutia or the principle of some deal point and lose sight of the big picture.

Buying a business is an extraordinarily stressful and high pressure process. For most buyers, their life savings and their future is at stake. The emotions and the stress of the deal negotiations and diligence often cloud their judgement and force them to make decisions that cause them to lose the deal when professional advisors who are paid to maintain objectivity could have saved the deal by proposing alternatives or lending objective perspective.

Many business buyers who leave the corporate world to buy a business do so for the wrong reason. Their goal is not necessarily to buy and build a business. That’s icing on the cake. Their primary goal is to buy an income. They want to replace the big salary they had in the comfortable corporate world. That shrinks the deal pool substantially. The number of businesses that will provide the income they require all command a premium price. That premium price most often forces the buyer to take on debt. Once debt service is factored into the pro forma financial estimates, the owner can no longer afford to pull that big salary out of the business.

There are about a billion ways that a deal can die. To make it worse, about 99% of the reasons and ways deals die can’t be controlled, avoided or forecasted. Inexperienced buyers simply have no understanding of the odds of making it past the finish line.

Those are many of the reasons why so many people who do successfully get a deal done and in so doing, spend hundreds of thousands to millions of dollars, often ironically feel like they just won the lottery.